Economic Consequences of Common Law versus Civil Law

September 7, 2001

Russia's early failures to build capitalism after the collapse of communism led a group of economists to ponder the cause. Led by Harvard University's Andrei Shleifer, the team looked at 49 countries and came to the conclusion that two distinctly different legal traditions might explain why some countries prosper under capitalism -- while other countries are not so successful.

The differing legal systems emerged in England and France in the 12th century and spread to those countries' colonies. England developed the tradition of the common law, while France and other continental European countries inherited a civil law system from the Romans.

Common-law countries -- including the U.S. and other former British colonies -- rely on independent judges and juries and legal principles supplemented by precedent-setting case law, which results in greater flexibility.

In civil-law countries -- which include much of Latin America -- judges often are life-long civil servants who administer legal codes packed with specific rules, which hobbles them in their ability to cope with change.

So common-law countries enjoy certain advantages in the conduct of business which are denied to civil-law societies.

Civil-law countries exhibit heavier regulation, weaker property rights protection, more corrupt and less efficient government and less political freedom than do common-law countries.

Because investors are less certain of their property rights in civil-law countries, few people own stocks, bond and stock markets are smaller and more companies are controlled by a few big holders.

The situation discourages investment and economic growth.

In an increasingly global economy, the need to reconcile these competing systems becomes obvious.

Source: David Wessel, "Capital: The Legal DNA of Good Economies," Wall Street Journal, September 6, 2001.